Mid-Year Steps to Save on Your Taxes (Fidelity)

Midyear tax check: 9 questions to ask

A midyear tax checkup will help you to prepare for the tax consequences of life changes.

• FIDELITY VIEWPOINTS 
• – 06/28/2017

• Taxes 
• 401(k) 
• IRA 
• Rollover IRA

 

 
 
 
 
 

Key takeaways

✔ Evaluate the tax impact of life changes such as a raise, a new job, marriage, divorce, a new baby, or a child going to college or leaving home.

✔ Check your withholding on your paycheck and estimated tax payments to avoid paying too much or too little.

✔ See if you can contribute more to your 401(k) or 403(b). It is one of the most effective ways to lower your current-year taxable income.

In the midst of your summer fun, taking time for a midyear tax checkup could yield rewards long after your vacation photos are buried deep in your Facebook feed.

Personal and financial events, such as getting married, sending a child off to college, or retiring, happen throughout the year and can have a big impact on your taxes. If you wait until the end of the year or next spring to factor those changes into your tax planning, it might be too late.

“Midyear is the perfect time to make sure you’re maximizing any potential tax benefit and reducing any additional tax liability that result from changes in your life,” says Gil Charney, director of the Tax Institute at H&R Block. 

Here are 9 questions to answer to help you be prepared for any potential impacts on your tax return.

1. Did you get a raise or are you expecting one?

The amount of tax withheld from your paycheck should increase automatically along with your higher income. But if you’re working two jobs, have significant outside income (from investments or self-employment), or you and your spouse file a joint tax return, the raise could push you into a higher tax bracket that may not be accounted for in the Form W-4 on file with your employer. Even if you aren’t getting a raise, ensuring that your withholding lines up closely with your anticipated tax liability is smart tax planning. Use the IRS Withholding Calculator; then, if necessary, tell your employer you’d like to adjust your W-4.

Another thing to consider is using some of the additional income from your raise to increase your contribution to a 401(k) or similar qualified retirement plan. That way, you’re reducing your taxable income and saving more for retirement at the same time. 

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2. Is your income approaching the net investment income tax threshold?

If you’re a relatively high earner, check to see if you’re on track to surpass the net investment income tax (NIIT) threshold. The NIIT, often called the Medicare surtax, is a 3.8% levy on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) above $200,000 for individuals, $250,000 for couples filing jointly, and $125,000 for spouses filing separately. In addition, taxpayers with earned income above these thresholds will owe another 0.9% in Medicare tax on top of the normal 2.9% that’s deducted from their paycheck.

If you think you might exceed the Medicare surtax threshold for 2017, you could consider strategies to defer earned income or shift some of your income-generating investments to tax-advantaged retirement accounts. These are smart strategies for taxpayers at almost every income level, but their tax-saving impact is even greater for those subject to the Medicare surtax.

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3. Did you change jobs?

If you plan to open a rollover IRA with money from a former employer’s 401(k) or similar plan, or to transfer the money to a new employer’s plan, be careful how you handle the transaction. If you have the money paid directly to you, 20% will be withheld for taxes and, if you don’t deposit the money in the new plan or an IRA within 60 days, you may owe tax on the withdrawal, plus a 10% penalty if you’re under age 55.

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4. Do you have a newborn or a child no longer living at home?

It’s time to plan ahead for the impact of claiming one more or less dependent on your tax return.

Consider adjusting your tax withholding if you have a newborn or if you adopt a child. With all the expenses associated with having a child, you don’t want to be giving the IRS more of your paycheck than you need to. 

If your child is a full-time college student, you can generally continue to claim him or her as a dependent—and take the dependent exemption ($4,050 in 2017)—until your student turns 25. If your child isn’t a full-time student, you lose the deduction in the year he or she turns 19. Midyear is a good time to review your tax withholding accordingly.

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5. Do you have a child starting college?

College tuition can be eye-popping, but at least you might have an opportunity for a tax break. There are several possibilities, including, if you qualify, the American Opportunity Tax Credit (AOTC). The AOTC can be worth up to $2,500 per undergraduate every year for four years. Different college-related credits and deductions have different rules, so it pays to look into which will work best for you.

Regardless of which tax break you use, here’s a critical consideration before you write that first tuition check: You can’t use the same qualified college expenses to calculate both your tax-free withdrawal from a 529 college savings plan and a federal tax break. In other words, if you pay the entire college bill with an untaxed 529 plan withdrawal, you probably won’t be eligible for a college tax credit or deduction.

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6. Is your marital status changing?

Whether you’re getting married or divorced, the tax consequences can be significant. In the case of a marriage, you might be able to save on taxes by filing jointly. If that’s your intention, you should reevaluate your tax withholding rate on Form W-4, as previously described.

Getting divorced, on the other hand, may increase your tax liability as a single taxpayer. Again, revisiting your Form W-4 is in order, so you don’t end up with a big tax surprise in April. Also keep in mind that alimony you pay is a deduction, while alimony you receive is treated as income.

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7. Are you saving as much as you can in tax-advantaged accounts?

OK, this isn’t a life-event question, but it can have a big tax impact. Contributing to a qualified retirement plan is one of the most effective ways to lower your current-year taxable income, and the sooner you bump up your contributions, the more tax savings you can accumulate. For 2017, you can contribute up to $18,000 to your 401(k) or 403(b). If you’re age 50 or older, you can make a “catch-up” contribution of as much as $6,000, for a maximum total contribution of $24,000. Self-employed individuals with a simplified employee pension (SEP) plan can contribute up to 25% of their compensation, to a maximum of $54,000 for 2017.

This year’s IRA contribution limits, for both traditional and Roth IRAs, are $5,500 per qualified taxpayer under age 50 and $6,500 for those age 50 and older. Traditional and Roth IRAs both have advantages, but keep in mind that only traditional IRA contributions can reduce your taxable income in the current year.

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8. Are your taxable investments doing well?

If your investments are doing well and you have realized gains, now’s the time to start thinking about strategies that might help you reduce your tax liability. Tax-loss harvesting—timing the sale of losing investments to cancel out some of the tax liability from any realized gains—can be an effective strategy. The closer you get to the end of the year, the less time you’ll have to determine which investments you might want to sell, and to research where you might reinvest the cash to keep your portfolio in balance.

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9. Are you getting ready to retire or reaching age 70½?

If you’re planning to retire this year, the retirement accounts you tap first and how much you withdraw can have a major impact on your taxes as well as how long your savings will last. A midyear tax checkup is a good time to start thinking about a tax-smart retirement income plan. 

If you’ll be age 70½ this year, don’t forget that you may need to start taking a required minimum distribution (RMD) from your tax-deferred retirement accounts, although there are some exceptions. You generally have until April 1 of next year to take your first RMD, but, after that, the annual distribution must happen by December 31 if you want to avoid a steep penalty. So if you decide to wait to take your first RMD until next year, be aware that you’ll be paying tax on two annual distributions when you file your 2018 return.

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No significant changes in your life situation or income?

Midyear is still a good time to think about taxes. You might look into ways you can save more toward retirement, gift money to your children and grandchildren to remove it from your estate, or manage your charitable giving to increase its tax benefits and value to beneficiaries. A little tax planning now can save a lot of headaches in April—and maybe for years to come.

Paying for College (Morningstar)

The Short Answer

Ways to Pay for College If Your 529 Isn't Enough

By Karen Wallace | 11-24-15 | 06:00 AM | Email Article

Question: The amount we've saved in our child's 529 account will likely not cover the full cost of college. What are our options? Is there an order to tap other assets that makes the most sense?

Answer: There are many considerations, and the best strategy will, of course, depend on your individual situation. In addition to taking stock of the assets your family already has available to pay the bill in various college-savings accounts (529s, Coverdells, UGMA/UTMA accounts, and so on), you'll also want to assess whether your child might qualify for scholarships, grants, and credits.

Definitely do not skip the step of filling out and submitting a Free Application for Federal Student Aid, or FAFSA; schools use the information reported on the FAFSA to determine how much aid you qualify for. Also, remember to fill it out every year you plan to attend college. Bear in mind that colleges define "aid" more broadly than you or I might. Some of this aid will need to be paid back (such as loans), and some of it will not (such as grants and scholarships).

The amount of financial aid you are eligible to receive is based on your "financial need," which is the difference between the cost of attendance (determined by each school) and the expected family contribution (a measure of the family's financial strength, calculated according to a formula established by law). So, the lower your expected family contribution and/or the higher the cost of attendance at the school, the greater your financial need.

1) Grants and Scholarships
Grants and scholarships are among the most desirable forms of financial aid and should be considered first. Grants and scholarships, also sometimes referred to as "gift aid," are essentially free money--they are financial aid that doesn't have to be repaid. Grants are often need based, while scholarships are usually merit based. Do your research to find out which grants or scholarships you might be eligible for and what their application deadlines are. (One caveat, however: Per theDepartment of Education's website, you might have to pay back part or all of a grant in the event you withdraw from school before finishing an enrollment period such as a semester.)

2) The AOTC 
If you are eligible for the American Opportunity Tax Credit (AOTC), carve out $4,000 in college expenses to be paid with cash or loans ahead of all other sources of money, advises Mark Kantrowitz, a financial-aid expert. You can then use the AOTC to offset those expenses. The AOTC isn't available to everyone: Qualified taxpayers with modified adjusted gross incomes of $80,000 or less (or $160,000 or less for joint filers) qualify for the full credit. Taxpayers earning more than this may qualify for a partial credit, but a taxpayer whose MAGI is greater than $90,000 ($180,000 for joint filers) cannot claim the credit. For more on this, click here.

The reason that AOTC-eligible families should carve out $4,000 of tuition and textbook expenses each year that will be paid for with cash or loans is because the AOTC is worth more than the tax-free 529-plan distribution. The AOTC yields a dollar-for-dollar tax credit based on the first $2,000 of tuition and textbook expenses, then $0.25 on the dollar for the next $2,000). It's also important to remember that you can't use the same qualified higher-education expenses to justify two education tax benefits. For example, you can't use a tax-free distribution from a 529 plan to pay for tuition and textbook expenses that you also want to use to justify the AOTC.

3) Federal Student Loans
As a next step, Kantrowitz recommends figuring out how much of a gap you'll have beyond need-based aid and the 529-plan money, and whether some of it can be covered with Direct Subsidized Loans or Direct Unsubsidized Loans, which have low fixed interest rates and do not require a credit check.

One of the benefits of subsidized loans is that the U.S. Department of Education pays the interest for you if you're in school at least half-time and for a limited grace period after you leave school. This makes subsidized loans a better deal for the borrower than other types of loans, where interest begins to accrue immediately. In addition, subsidized loans have low fixed interest rates--the current rates are 4.29% on a Stafford loan for an undergrad and 5% on a Perkins loan.

Another option is unsubsidized Stafford loans, which are available to all students regardless of financial need. The unsubsidized federal Stafford loan has a fixed interest rate that is among the lowest available interest rates for unsecured debt (currently 4.29% for an undergrad) that is not based on the borrower's credit, Kantrowitz points out. Though the limits are higher than with subsidized Stafford loans, there are also limits to how much you can borrow with unsubsidized Stafford loans.

4) Spend Down Certain Types of Student-Owned Assets Before 529 Assets
In terms of drawing down different types of college-savings accounts, some important considerations have to do with how different assets are "counted" when calculating the expected family contribution. If possible, you should first spend down any assets that have a bigger impact on reducing the aid a student is eligible to receive.

For instance, if you have one, UGMA and UTMA accounts should be spent down before taking a qualified distribution from a 529 plan. The reason is that UGMA/UTMA assets are student owned and reduce financial-aid eligibility by a harsher 20% of the asset value. For this reason, Kantrowitz recommends spending the assets in UGMA/UTMA accounts down to zero before taking a qualified distribution from the 529 plan. Likewise, savings accounts, real estate, mutual funds, or stocks and bonds held in the student's name can also have a bigger impact in terms of reducing the aid a student is eligible to receive.

5) Spend 529-Plan Money to Fill In Any Remaining Gaps
Assets in a 529-plan account can also reduce aid eligibility, but not to the same extent that UGMA/UTMA and other types of student-owned assets can. If the 529-plan account is owned by a dependent student or the dependent student's custodial parent, it is reported as a parent asset on the FAFSA. In a worst-case scenario, this will reduce aid eligibility by up to 5.64% of the asset value, Kantrowitz said.

6) Federal Parent PLUS Loan
Another option is to use a federal Parent PLUS loan to address any remaining gaps that can't be covered by grants and scholarships, student loans, and 529 assets, Kantrowitz says. The PLUS loan has a fixed interest rate for the life of the loan (currently 6.84%), plus a loan fee.

Unlike with student loans, the Parent PLUS loan does depend on the borrower's credit history, but the credit check may not be as stringent as with some private loans. That said, Kantrowitz points out that borrowers with excellent credit may be able to qualify for a lower interest rate on a private loan than on the federal Parent PLUS loan. (Just be aware that if you sign up for a variable-rate loan, rates really have nowhere to go but up from here.)

Kantrowitz also points out that needing to borrow a Federal PLUS loan or a private student or parent loan may be a sign of overborrowing. Although taking on debt to finance college is unavoidable in many cases, there are some important considerations. In terms of students taking on debt, an oft-cited rule of thumb is that their total education debt should be less than their expected starting annual salary--otherwise, they will have trouble paying back that loan debt. Likewise, it's a good idea for parents to be conservative about how much debt they can comfortably take on, particularly as they near retirement and may have reduced incomes and fewer resources available to pay off the loans.

Karen Wallace is a senior editor with Morningstar.com.

What are the Best College Savings Plans (Morningstar)

Morningstar Names Best 529 College-Savings Plans for 2015

Twenty-nine plans are Morningstar Medalists, and two receive Negative ratings.

Leo Acheson, 10/22/2015

Each year, Morningstar evaluates and rates college-savings plans based on five key pillars--Process, People, Parent, Price, and Performance. When rating 529 plans, Morningstar also takes into consideration any unique benefits that plans offer to college savers, including local tax breaks, grants, and scholarships. Morningstar’s "Choosing a 529 Investment," available here and summarized in an article tomorrow, covers some of these main considerations.

In 2015, Morningstar identified 29 plans expected to outperform peers on a risk-adjusted basis over the long haul, assigning those plans Gold, Silver, and Bronze Morningstar Analyst Ratings. Plans that receive Gold and Silver ratings stand out because of generally attractive investment lineups, well-resourced asset-allocation teams, capable oversight, and competitive fees. Bronze-rated plans also offer compelling features, though Morningstar’s analysts don’t have quite as much conviction that these plans will outpace competitors over time.

Meanwhile, 32 plans received Neutral ratings, a reflection of the team’s belief that, although these plans likely won’t deliver standout risk-adjusted returns, they are also unlikely to significantly underperform. Some Neutral-rated programs may hold appeal for in-state residents because of meaningful added benefits, such as local tax breaks, so investors should research their state’s particular benefits.

Just two plans earned Negative ratings in 2015. These plans have flaws that will most likely lead to underperformance over long investment horizons.

This year, Morningstar upgraded five plans and downgraded one, compared with five upgrades and 10 downgrades in 2014. In general, the industry continues to take steps in the right direction, with a number of plans cutting fees or improving the quality of their investment lineups.

Gold MedalistsThe four Gold-rated plans represent some of the best options available to college savers. Investors who favor active management will find much to like with the Maryland College Investment Plan and Alaska’s T. Rowe Price College Savings Plan. Both enlist T. Rowe Price as the program manager and use highly regarded strategies from the firm. The plans also stand out for their asset-allocation glide paths. Unlike some plans that reduce equities in large, abrupt steps at various ages for the beneficiary, these plans’ age-based tracks gradually reduce their stock stakes each quarter to limit the risk of shifting out of equities shortly after a market sell-off.

College savers looking for low-cost, broad diversification should consider Nevada’s Vanguard 529 College Savings Plan, which uses all passively managed strategies. Although many plans have adopted a similar set of inexpensive Vanguard indexes, this plan has lower fees than most thanks to its economies of scale. With nearly $11 billion in assets, it is the second-largest direct-sold plan in the nation. It has passed along cost savings to investors, who can own the age-based portfolios for just 0.19%.

Gold-rated Utah Educational Savings Plan should particularly appeal to investors who want to build customized portfolios. In addition to its premixed offerings, it also allows account holders to design their own age-based tracks using a wide array of investment options. The plan offers primarily Vanguard index funds and mixes in a few strategies from Dimensional Fund Advisors.

Silver MedalistsFour plans carried over their Silver ratings from 2014, including two programs from Virginia. With over $46 billion in assets, advisor-sold CollegeAmerica is more than twice the size of the nation’s second-largest 529 plan. Investors in the program can choose from a compelling set of equity and balanced fund options from American Funds. These investments also underpin the plan’s age-based and static-allocation portfolios, and the plan has some of the lowest-priced investments in the advisor-sold space. Virginia’s direct-sold plan, Virginia529 inVEST, also receives a Silver rating. It uses an assortment of specialty asset classes within its age-based options that aren’t always found in direct-sold 529 plans, such as stable value and global REITs. The age-based track blends active and passive management, favoring index strategies in more-efficient asset classes, and uses strategies from a variety of highly regarded firms.

Ohio’s CollegeAdvantage and Michigan Educational Savings Program also retained their Silver ratings. CollegeAdvantage offers investors a breadth options, including three all-index tracks and one age-based track that mixes active and passive management, while Michigan Education Savings Program uses index strategies from program manager TIAA-CREF. Both offer their investment options at low prices.

Morningstar also upgraded three plans to Silver from Bronze in 2015 thanks to various improvements made by the plans. New York's 529 College Savings Program previously omitted foreign equities from the age-based and static allocation options, though it lacked a solid investment-based reason for doing so. It addressed that shortcoming in July 2015, adding international stocks and bonds to the mix. The plan uses all Vanguard index options and remains one of the industry’s cheapest direct-sold programs.

California’s direct-sold ScholarShare reaffirmed its commitment to open architecture over the last year, which helped it to regain its Silver rating. The plan has long stood out for its use of best-in-class active managers regardless of fund company affiliation. However, in 2014, it quickly removed PIMCO Total Return from the lineup following Bill Gross’ departure and replaced it with Neutral-rated TIAA-CREF Bond Plus strategy, calling into question the state’s dedication to open architecture. It’s good to see that, following additional analysis, California elected to more permanently house this sleeve of bond assets with Gold-rated Metropolitan West Total Return Bond.

Lastly, Illinois’ advisor-sold Bright Directions College Savings Plan cut fees significantly in the process of renegotiating a contract with program manager Union Bank and Trust. In addition to lowering program management fees, the plan eliminated its account setup and maintenance fees.

Bronze MedalistsWhile not as attractive as Gold- and Silver-rated plans, programs that receive Bronze Morningstar Analyst Ratings also hold appeal. In some cases, generous tax benefits can boost a plan’s rating to Bronze, as is the case with Indiana’s direct- and advisor-sold plans. Hoosiers receive a 20% tax credit on contributions of up to $5,000 to the state’s plan, which more than offsets some of the plans’ high fees.

Morningstar bumped one plan’s rating to Bronze from Neutral in 2015: Maine’s NextGen College Investing Plan Direct has reduced fees in each of the past two years, and a few fixed-income funds used within the age-based track managed by BlackRock recently received upgrades of their Morningstar Analyst Ratings. The plan’s expenses now appear attractive, and it offers Maine residents additional benefits in the form of public and private grants.

Neutral RatingsIn 2015, 32 plans received Neutral Morningstar Analyst Ratings, indicating that analysts believe those programs likely won’t outperform or underperform their peers by a significant margin. College savers in these plans should expect returns to land near their peer-group norms over the long haul. Investors living in states with Neutral-rated plans without local tax breaks or other benefits should consider looking nationwide at a Gold- or Silver-rated plan.

In 2015, Morningstar upgraded one plan to Neutral from Negative and downgraded another to Neutral from Bronze. Kansas’ direct-sold Schwab 529 College Savings Plan has improved over the past year, garnering it an upgrade to Neutral from Negative. It had long charged hefty fees to investors, but in 2015 it slashed expenses for its passive and active age-based options by about 45% and 25%, respectively. Such fee cuts mark a meaningful commitment to providing better outcomes for investors. Meanwhile, Nevada’s USAA College Savings Plan’s rating fell to Neutral. The plan has a decent, but not standout, manager lineup, and its fees look middling versus competitors. Moreover, Nevada has no state income tax, so its residents have good reason to shop around.

Avoid These OfferingsMorningstar assigned two plans Negative Morningstar Analyst Ratings in 2015. Both plans also received Negative ratings in 2014. High fees continue to detract from the appeal at South Dakota’s CollegeAccess 529. Although South Dakotans can gain access to the plan for a relatively attractive price, out-of-staters--who make up the majority of the plan’s assets--pay significantly higher expenses. Annual account maintenance fees of $20 create a further hurdle to results.

Arizona’s Ivy Funds InvestEd 529 Plan continues to look unattractive, owing largely to concerns about the plan’s oversight. Program manager Waddell & Reed, parent of Ivy Funds, receives a Negative parent rating stemming from concerns regarding the firm’s thin fixed-income resources and recent manager turnover. The state's oversight also fails to inspire confidence. Arizona defers heavily to Waddell & Reed and, unlike many states, has not hired an investment consultant to help monitor the plan. Arizona is a tax parity state, so residents receive a state tax benefit for investing in any state’s 529 plan--there’s no reason for Arizonans to limit themselves to their home state’s offerings.

Analyst Rating Inputs
Since 2012, ratings for 529 plans use the same scale as the Morningstar Analyst Rating for mutual funds. Both Analyst Rating methodologies consider the same five factors to arrive at the final rating, though the 529 ratings reflect the quality of the entire plan--not a single investment, as is the case for the fund rating. To arrive at an Analyst Rating for 529 plans, analysts consider:

·         Process: Did the plan hire an experienced asset allocator to design a thoughtful, well-diversified glide path for the age-based portfolios? What suite of investment options is offered?

·         People: What is Morningstar’s assessment of the underlying money managers’ talent, tenure, and resources?

·         Parent: Is the program manager a good caretaker of college savers' capital? Is the state managing the plan professionally?

·         Performance: Have the plan’s options earned their keep with solid risk-adjusted returns over relevant time periods? How is the plan expected to perform going forward?

·         Price: Are the investment options a good value?

Money for College - Dos and Don'ts (Morningstar)

Dos and Don'ts of College Savings

Knowing financial aid rules is key given the rising cost of higher education.

Morningstar, 04/27/2012


Investor Question: I'm worried about how we're ever going to afford college for our children. What can we do to increase their odds of getting financial aid in case we can't save enough?

Answer: For many families, the cost of college has become daunting. Tuition, fees, room, and board at a public four-year school currently run $17,131 per year on average (in-state), and $38,589 per year for a private four-year school, according to the College Board. During the past decade, in-state tuition and fees at public universities have increased on average 5.6 percentage points per year beyond the rate of inflation. No wonder, then, that many parents are losing sleep worrying about how they will be able to pay for their children's college education and how much help they can expect from financial aid.

But whether college is just around the corner or years down the road for the student, there are many steps parents can take to improve their odds of making it affordable, including qualifying for financial aid. Below are some ideas to help get them started. Keep in mind that some financial aid is need-based while some is not and that aid includes not just grants and scholarships, but also work-study programs and loans.

Do: Start Saving as Soon as Possible
Some parents worry that saving for college will negatively affect their student's chances for financial aid. But that's misguided, says college planning expert Mark Kantrowitz, publisher of FinAid, an online guide to college funding. "There's this perception that you'd be better off not saving anything," Kantrowitz says, "but the reality is most of the financial aid you're likely to get is going to be in the form of loans, which you're better off not having to pay."

Kantrowitz estimates that every dollar saved for college potentially reduces a student's borrowing costs by two. He suggests parents and students start saving for college as early as possible, noting that he started saving for his children to go to college before they were even born.

Kantrowitz likes 529 accounts as college-savings vehicles in part because of their tax deductibility (in some states), which he likens to "getting a discount on college costs." (You can visit Morningstar.com's 529 Plan Center here.)

Do: Apply for Any Scholarships for Which the Student Might Be Eligible

Applying for scholarships costs nothing but time, and the payoff could make a big difference in reducing out-of-pocket college costs. An obvious place for parents to start is by filling out the Free Application for Federal Student Aid, or FAFSA, the federal government's form for need-based grants, loans (both need-based and non-need-based), and work-study opportunities. Good online resources for scholarship searches include Fastweb and Scholarships.com. Kantrowitz says about one out of eight incoming freshmen at four-year colleges are on some kind of scholarship, with the average amount around $2,800 per student. "The students who win a lot of money are the ones who apply for every scholarship for which they are eligible," he says. One important tip when applying for scholarships: The more optional information provided, the better the odds of matching. For example, if a student or parent has had cancer, including that in the student's profile helps improve his or her chances of matching one of the many scholarships related to the disease.

Do: Have Kids Close Together in Age

Financial aid formulas are weighted heavily on parental income, and having multiple kids in college at the same time actually improves financial aid eligibility because it reduces the amount parents are expected to pay for each. This helps ease the burden on families having to pay two or more tuitions simultaneously. "Someone who has twins is going to get more aid than someone who has single children separated by four years," Kantrowitz says. Of course, it may be a little late to put this plan into action for most parents, but it also works if, say, a parent attends college at the same time as their child or children. Having an older child delay college to attend at the same time as a younger sibling also works.

Don't: Put Assets in the Student's Name

In financial aid calculations, assets belonging to parents have less of a negative impact than those belonging to students. So money in a 529 plan, which is considered the parents' property, counts less against financial aid than, say, money held in a custodial account such as a UGMA/UTMA, which is legally considered the student's property. One way around this problem is to spend down the student's assets before applying for aid. UGMA/UTMA funds can be used for a wide variety of qualifying expenses, so long as they are for the minor's benefit. Incidentally, money in a 529 opened by a grandparent on behalf of a student does not count against financial aid.

Don't: Count on the Student Getting a Full-Ride Scholarship

Expecting a child's academic or athletic brilliance to bail the parents out from having to pay for college? Think again. Fewer than 0.3% of students win full-ride scholarships or need-based full-ride grants, says Kantrowitz, whereas about two thirds of all undergraduates receive some kind of financial aid, including student loans.

Don't: Sell Assets the Year Before Applying for Aid

A common mistake parents make, Kantrowitz says, is to sell a large chunk of taxable investments to help pay for college the year before applying for aid. This might trigger capital gains that add to parental income and thus reduce financial aid eligibility. (Converting traditional IRA assets to a Roth can also add to taxable income, thereby hurting financial aid eligibility.) Keep in mind that students usually must reapply for financial aid each year, so holding off and waiting a year to sell might not help. It's best to plan ahead if possible by putting funds for college in a 529, where their impact on financial aid is reduced.


Other Financing Methods, With Caveats

Some parents opt to use their retirement accounts to help fund college costs. This has its advantages and disadvantages. The biggest advantage to this approach is that the 10% penalty for early withdrawals is waived if the money is used for qualified college expenses. Also, Roth IRA contributions might be withdrawn tax-free, though any earnings on those contributions are subject to regular income tax rates. All withdrawals from traditional IRAs are subject to regular income tax rates. The problem with this approach is that all IRA withdrawals, whether taxed or not, count as total parental income in financial aid calculations. So even though parents might save on taxes or penalties by doing this, they might also make it more difficult for the student to obtain need-based financial aid.

Borrowing from work-based retirement accounts, such as a 401(k) or 403(b) plan, is another option and does not affect need-based financial aid. However, the loan must be repaid within five years, and possibly immediately in the case of job loss. Parents might be eligible for hardship withdrawals, but those are subject to income taxes and penalties.

10 Ways to Invest Tax Free (Forbes)

10 Ways to Invest Tax Free (Forbes)

William Baldwin, Forbes Staff

Taxes|2/10/2011

For the moment, taxes on portfolios are modest. The federal rate is 15% on most dividends and on long-term capital gains. Come 2013, though, the rates shoot up.

Without a law change, the maximum federal tax on interest, dividends and short-term gains will go to 44.6%. That consists of a 39.6% stated rate, the 1.2% cost of a deduction clawback and a 3.8% surtax to pay for health care. The max for long gains will be 25% (but 23% for assets held for more than five years). Add state taxes to all of these.

What’s an investor to do? Take defensive measures. Here are ten ways to pocket investment income without paying tax on it.


Set up a kiddie Roth


Did your daughter earn $4,000 last summer that she needs for college? Were you going to leave her at least $4,000 in your will? Start your bequest now. Hand her $4,000 that she can use to fund a Roth IRA. Tell her not to touch it until she is 60.

She’ll get 40 years of tax-free compounding. (At 7% a year, this would turn $4,000 into $60,000.) You’ll get money out of your estate, probably saving on state inheritance taxes.

.

Buy an MLP

Master limited partnerships that own energy assets like pipelines tend to pay pretty good dividends (in the neighborhood of 5%). Those dividends, at least initially, are largely sheltered by depreciation deductions. The quarterly cash, that is, is considered a nontaxable “return of capital.”

After a decade or two this tax shelter is exhausted, but if you die owning these shares your heirs get to start the process over with a new, higher tax basis.

Go Ugma

Use the Uniform Gift to Minors Act (a.k.a. Uniform Transfers to Minors Act) to set up a brokerage account for your son or daughter. The first $950 of annual income is free of tax; the next $950 is taxed in the kid’s low bracket.

The downside is that at age 18 Junior takes ownership and might not spend the money on college, as you intend. So fund the account modestly­—$30,000 is plenty—and concentrate the holdings on investments that (a) generate a lot of taxable income and (b) are compelling additions to the overall family portfolio. The idea is to make full use of that $1,900-a-year shelter while parting with a small amount of capital.

Here are several examples of investments that make sense in a diversified portfolio and that spew out a lot of ordinary income:

–exchange traded funds that hold a lot of Ginnie Maes and the like (MBB) or the whole bond market (BND).

–the ETF for junk bonds (JNK).

–high-yielding blue chips like Verizon, AT&T and Pfizer.

–preferred stocks.

Two cautions. (1) To avoid gift tax wrinkles, limit each year’s contribution to $26,000 per child ($13,000 if you are single). (2) Don’t set up Ugmas if you think your kid will qualify for college financial aid. Any assets in the kid’s name will be snatched by aid officers.

.

Open a 529

A Section 529 plan lets you accumulate investment income tax free, provided the proceeds are used on schooling. Drawback: Sometimes stiff fees erase the income tax saving.

The account is likely to be a good idea where the costs are low (as in Utah) or there’s a break on state income tax for parents chipping money in (as in New York).

As with Ugmas, 529s are not a good idea for families likely to get tuition assistance.

.

Own commercial real estate

As long as your building doesn’t have too much of a mortgage, depreciation deductions will make a good chunk of your rental income free of current income tax. There’s more on the economics of these deals here.

.

Own muni bonds

Interest on the general obligations of state and local governments is free of federal income tax. In most states you also get a pass on state income tax for home-state bonds. Caution: Some states are in financial trouble. Check out the Forbes Moocher Ratio before buying.

.

Give away stock profits

You put $3,000 into Netflix, wait at least a year, then give away the shares to charity when they’re worth $8,000. You get a deduction for the whole $8,000. Your $5,000 gain is never taxed.

Two other ways to shelter appreciated property from capital gain taxation: leave it in your estate, or give it to a low-bracket relative.

Bequeathed property benefits from a step-up, meaning that gains unrealized by an owner at the time of his death permanently escape income taxation.

Low bracket taxpayers (people who would be in a 25% or lower bracket if all their capital gain were taxed as ordinary income) get a free ride on long-term capital gains. But if the donee is a son or daughter 18 or younger (23 if in school), beware the kiddie tax, which applies to investment income over $1,900 a year.

.

Capture losses

When the market is down, swap out of losing positions into similar but not identical ones. For example, you could exit an S&P 500 index fund and immediately buy the Vanguard Megacap Index Fund. In this fashion, you can run up a capital loss carryforward that will make future capital gains tax free. For more on loss harvesting, go here.

.

Buy a safe


If your $400 investment saves you $45 a year in safe deposit box fees, you’ve got an 11% yield, tax free. The only exception on the tax side would be if you are one of those rare birds in a position to deduct miscellaneous items like the rental on a strongbox to hold your gold coins. Miscellaneous deductions are usable only to the extent they exceed 2% of your adjusted gross income; not many taxpayers get anywhere near this threshold.

.

Be a cheapskate investor

Are you paying someone 1.5% a year to have your assets managed? Cut this cost in half by haggling. A dollar saved in this fashion is a dollar earned free of tax, unless you are claiming miscellaneous deductions, which is unlikely.


--------------------------------------------------------------------------------

This article is available online at:
http://www.forbes.com/sites/baldwin/2011/02/10/ten-ways-to-invest-tax-free/
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What College Degrees Will Get You A GOOD Job? What Good Jobs Can You Get WITHOUT a College Degree?

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Source: Guide to Online Schools

College Loans - Tips for FAFSA (Fidelity)

5 tips for tackling FAFSA
BY Mark McLaughlin,
Fidelity Interactive Content Services — 02/08/11

Virtually anyone who wants college aid must fill out a form known as FAFSA. Here’s the lowdown on the 136-question document.
Now that your high school senior has put the finishing touches on her college admissions essays, it’s your turn to grapple with an application deadline.

Welcome to the world of FAFSA.

The federal government’s Free Application for Federal Student Aid, also known as FAFSA, is a prerequisite for undergrads to qualify for a host of federal aid programs, from grants to student loans. While individual colleges set their own deadlines for filing FAFSA, the first major due date is approaching: Feb. 15, for students applying to schools in Connecticut.


“We encourage everyone to apply through FAFSA,” says Tom Graf, executive director of the Massachusetts Education Financing Authority, a nonprofit state agency that focuses on college financing for families.

In recent years the sluggish economy and stubbornly high unemployment have sent the number of FAFSA applications soaring. For the first four weeks of this year, applications were up 40% from the same period last year, according to the federal Department of Education, which administers the FAFSA program.

A lot is at stake. For the 2009-2010 school year, the average undergrad received about $11,460 in loans and grants from federal, state and private sources, according to DOE. And while the FAFSA includes 136 questions on everything from student and family finances to your child’s academic background and planned course of study, veterans of the process say with a little preparation, it’s manageable.

Filing FAFSA “may seem daunting but it is pretty straightforward,’’ says Carol Meerschaert, a Fairfield, N.J., mother of two college graduates and a high school senior headed to college in the fall. Still, “This isn’t a late night, too-tired-to-think undertaking,” she says.

To make the process more efficient, and less painful, here are five things you should know when completing FAFSA with your college-bound child.

1. File even if you don’t expect aid
Beyond federal financial aid, the FAFSA also is used by many states, colleges and universities for their own assistance programs. Some colleges require it for students on athletic scholarships.

The perception that no aid will be available is perhaps the biggest reason families skip the FAFSA. A 2006 study by the American Council on Education found that 1.5 million college students who could have qualified for Pell grants in 2003-2004 failed to apply. More recently, former Secretary of Education Margaret Spellings said some 8 million students eligible for aid don’t even send in an application.

“Why turn any money away? Why leave any money on the table?” says Mary Fallon, a spokeswoman for Student Financial Aid Services Inc., a private firm that advises families on maximizing financial aid and runs the website www.fafsa.com. (It’s not affiliated with the federal Education Department).

Returning students should remember to refile FAFSA each year they’re enrolled in college. In addition to completing FAFSA, students applying to private colleges should also fill out the College Board’s CSS Financial Aid Profile to qualify for non-federal financial aid.

2. Don’t wait to file your taxes first
Many state and individual college deadlines fall before the federal tax deadline. Kentucky, Illinois, Oregon, South Carolina and Tennessee have started awarding aid, and most aid packages will be finalized before this year’s April 18 tax filing deadline, according to Mark Kantrowitz, an expert on college financial aid.

The FAFSA worksheet available at www.fafsa.ed.gov contains a summary of filing deadlines by state.

You can complete FAFSA using estimated tax information. Just choose the “Will File” option on the application form, and then estimate your income. You must remember to make any necessary adjustments once your taxes are complete; there is no penalty for doing so.

“Don’t wait until the last few days to file your forms,” says certified college planning specialist Manuel Fabriquer of CollegePlanning ABC. If you do, you’ll most probably run into technical difficulties because so many people will be filing then.

Filing the FAFSA
Applicants can file the form online or download a paper version at
www.fafsa.ed.gov, the website run by the Federal Student Aid office of the
Department of Education. Filing electronically is recommended because it’s
faster and you can correct errors. The site has tips to help
you file. Here are some to get you started:
Get a PIN: Apply for a Department of Education personal
identification number right away atwww.pin.ed.gov as they can take up
to five business days to process. Both parent and student need a
PIN, which allows you to sign FAFSA electronically and make
corrections.
Organize your paperwork: The FAFSA on the Web
worksheet highlights the main financial information you’ll need to include
on the application.
Predict potential aid:
The FAFSA4caster provides an estimate of your federal
financial aid eligibility. Studies have shown knowing your
potential award ahead of time increases the chance
you’ll apply.
Get help: The Federal Student Aid office can
answer questions online or over the phone. Contact
information is available on the website.
Save time: Returning college students can
choose to fill out a Renewal FAFSA that
pre-fills most of the information from the
previous year.
3. Highlight unusual circumstances
The FAFSA for the 2011-2012 school year is based on financial information from 2010 but it’s important to explain major changes, if any, in your family’s financial situation.

If you’ve suffered a job loss, answer yes to the Disclocated Worker question on the form. The question doesn’t allow for an explanation so follow up with a more detailed letter to the financial aid offices at your child’s target schools.

You should also explain other financial hardships such as reduced income, major medical bills and anything else that dramatically affects your income.

If you want to appeal an aid decision, remember that at most schools no appeals will be heard until the school has received a completed FAFSA — another reason to complete the application as soon as possible.

4. Your FAFSA could be flagged
After your FAFSA has been processed, you’ll receive a Student Aid Report that includes an Expected Family Contribution, expressed in dollars. The EFC is used by schools to help calculate how much federal aid your child may receive.

Don’t panic if your report includes an asterisk next to the EFC. This means the DOE is requiring documentation of your financial information. Its automated processing system selects up to 30% of each college’s applications for verification. This is not a formal audit but is required by the DOE.

Kantrowitz recommends parents submit the documents requested by the college as soon as possible because federal rules prevent the distribution of aid until verification is complete.

Your child’s Student Aid Report will not include an EFC if your application is incomplete, but it should explain what needs to be addressed. A common mistake is using dashes or leaving responses blank instead of entering zeros when asked for dollar amounts, explains Barbara Cooke, a college counselor in Kansas City, Mo.

5. FAFSA has its quirks
Federal financial aid calculations do not always follow the same guidelines as the tax code. This has led to confusion for students of divorced parents as well as those seeking to claim independence. Some things that often trip up parents:

For divorced parents, financial aid is based on the income of the parent the child lived with the most over the preceding 12 months. If that custodial parent has remarried, the income of the stepparent also figures into the EFC. The income of the noncustodial parent does not count.
Just because a student is living away from home and financially supporting herself, that does not mean she is considered independent, according to FAFSA. There are exceptions, if a student is married or a parent, for example, but few applicants will be successful filing independently of their parents, financial aid experts say.
The DOE’s Federal Student Aid office and state financial aid groups offer free assistance with FAFSA, or you can hire a private counselor to help. To sift through the wide variety of private counseling services available, use the search by state function on the National Institute of Certified College Planners website (http://www.niccp.com/search.asp).

“[FAFSA] is really a beginning to find out your ability to pay,’’ says MEFA’s Graf. “It’s the gateway to many of the financial aid options that are available.”

Tax Savings to Use Now ( from H R Block)

Tax Tips: 5 Things To Know This Tax Season


Life changes can mean tax savings. From the home-buyer credit to parenthood, to higher education and buying a new car, changes in the tax code affect the complexity of the 2010 tax filing season and could mean more money in taxpayers’ pockets.

Overall, the changes help taxpayers in five key areas:

Buying a home
Workers
Parenthood
Higher education
In the garage

Buying a home
More American homebuyers will get tax relief thanks to changes and expansions made to the homebuyer credit.

From seniors looking to downsize, to families wanting to move, to those shopping for their first home, this credit paves the way for more people to positively impact their taxes through the benefits of homeownership.

There are two major provisions of the homebuyer credit to keep in mind.

There is a tax credit worth up to $6,500 for existing homeowners in the market to move.
There is a new closing deadline for both first-time and repeat homeowners of April 30, 2010 – extended from Nov. 30, 2009. Also, a special provision gives taxpayers two extra months to close if they’ve entered into a contract by April 30, 2010.

Workers
Millions of taxpayers, depending upon other tax breaks they may qualify for, could find themselves with a tax surprise because of the Making Work Pay tax credit unless they adjusted their withholding last year, according to analysis by The Tax Institute.

Ninety-five percent of taxpayers automatically started taking home more money in their paychecks last year thanks to a change in the IRS withholding tables, triggered by the Making Work Pay credit. Taxpayers who should take special care in understanding the implications when filing a tax return include:

Married couples with two incomes
Individuals with multiple incomes
Retirees who have taxes withheld from a pension or social security benefits
Individuals who work but who can be claimed as a dependent on someone else’s tax return.

The credit, which taxpayers actually claim when filing their 2009 returns, could mean up to $400 for individuals and $800 for couples in 2009 and 2010. There is a phase out of the credit starting at modified adjusted gross income (MAGI) of $75,000 for single filers and for married filers at MAGI of $150,000. It’s completely phased out at MAGI of $95,000 for singles and $190,000 for married filers.

Parenthood
The recovery act expands the Child Tax Credit, allowing families to begin qualifying for the credit with every dollar earned over $3,000. For taxpayers, this change translates into a refundable credit of up to $1,000 for each qualifying child under 17 – even if the taxpayer has no tax liability.
The act also increases the Earned Income Credit for families with at least three or more children, where previously EIC benefits were capped at two children. The credit also would increase the beginning of the phase out for all married couples filing a joint return. That’s good news for married couples regardless of the number of children they have.

Higher education
Taxpayers getting a higher education or supporting a dependent in college should be aware of several tax credits and deductions. More taxpayers will be able to qualify for the American Opportunity Tax Credit, with a new, partially refundable $2,500 tax credit for college tuition paid in 2009. Nearly 4 million low-income students now will be able to qualify for the credit – because the credit is partially refundable.

Also, computer and technology costs qualify under the Section 529 Education Plans, which are tax-exempt college saving plans. Previously, eligible expenses included only tuition, room and board, books, supplies and equipment that were required for attendance at the school.

Whether you’re saving for education or paying school-related expenses now, help is out there. These tax savings are available to reduce your tax liability and help cover the out-of-pocket expenses for college.

In the garage
Taxpayers may have gotten a great deal on a new car in 2009 – especially if they took advantage of the cash for clunkers program – and they'll want to take advantage of a sales tax deduction on their taxes.

For those who purchased a new car, motorcycle, or even motor home may be able to deduct the state and local sales and excise taxes paid on the purchase of vehicles. The vehicles must have been purchased between Feb. 17 and Dec. 31, 2009.

Paying for College from 0 to 18 (NY Times)

April 19, 2009
Saving for College
18 Years in the Making
By RON LIEBER
Want to pick up the tab at Harvard for a child born today? It will probably cost about half a million dollars come 2027.

Hey, at least you have 18 years to plan. Parents footing the bill for tuition this fall are facing down a perfect storm of ugliness. Unemployment is rising, while bonuses and commissions aren’t what they once were for those who still have jobs. Others have no equity left in their homes thanks to declining housing prices. Those who do may have trouble finding a bank willing to hand out home equity loans that they can use to pay for college.

Beyond a more generous tax credit, President Obama’s moves so far don’t add up to much for most middle­-class families. For low-income students, Mr. Obama wants to guarantee Pell grant financing levels and to match inflation increases, and his stimulus package provides more Pell and work-study money. He is pushing to change the way federal loans are dispensed and to expand access somewhat to federal loans. But students who borrow already graduate with an average debt of $22,700.

Meanwhile, the devastation in the stock market has eroded not just families’ savings but university endowments that underwrite scholarships and grants.

How bad is it? Earlier this year, Kevin McKinley, a financial planner and college savings expert at McKinley Money in Eau Claire, Wis., received his first-ever referral from a psychotherapist, who thought the patient could reduce anxiety by seeing a financial professional.

“That’s not something that happens when the markets are doing well,” Mr. McKinley says.

Still, if you can break the process of saving for college into smaller pieces, it starts to seem more manageable. Start by reminding yourself that almost nobody can save enough to pay for four years of private education, let alone for more than one child. That’s not the goal here.

Mr. McKinley suggests an approach he calls “20-20-20.” Take the current average cost of attending four years at a public university: roughly $60,000. Save $20,000 before your child begins college by putting aside $50 a month starting at birth and assuming a 6 percent annual return. Then, pay $20,000 out of current income while the student is in college. Finally, have your child take out $20,000 in federal student loans over four years. The $200 monthly payments afterward are not a horrible burden for people in their 20s to bear, and they’ll be debt free once the 10-year payback period is over.

“It’s all doable with several very small sacrifices,” Mr. McKinley says.

You can aim higher, or lower, but the longer you wait to start, the more money you’ll probably need to borrow later. Better, then, to start at the birth of your first child and follow as many of the steps below as you can.

NEWBORNS AND TODDLERS

For most people, the best way to save for a child’s college education is still through a 529 savings plan. With 529s, you deposit after-tax money, but any earnings are free of taxes as long as you spend them on tuition, room, board and other postsecondary educational expenses.
You can look up your state’s plan at savingforcollege.com, a directory of college saving plans and advice. Most states have their own accounts, and many have two different kinds: investment accounts and prepaid accounts (it’s too early in the life cycle to discuss the prepaid variety, so more later on those).

Investment accounts are a bit like 401(k)’s in that you can usually choose from a handful of mutual funds and other investments, including one that gets less aggressive as your child’s date of college matriculation nears. (Just be sure that the fund manager’s definition of “aggressive” is similar to yours; some 529 investors have been surprised at the extent of their recent losses.)

Credit cards can help feed your savings. Some will reward you with refunds into a 529 account based on how much you spend. The Fidelity 529 College Rewards American Express card, for instance, gives you 2 percent back on all purchases as long as you deposit it into your Fidelity 529 account, including the plans it runs for individual states. (Anyone can invest in any state’s 529 investment plan; you aren’t limited to your own state’s).

Card earnings alone can easily add up to five figures after 20 years, depending on how much you put on the plastic annually. A few caveats, though. If you carry a balance or pay bills late, the interest and fees will more than wipe out the rewards. Credit card companies also often reduce rewards over time. And to maximize earnings, you’ll have to give up using your other credit cards to collect frequent-flier miles.

The Upromise college savings program offers several ways to earn cash for a 529, including 1 percent back on most purchases on its MasterCard; refunds based on what you buy at grocers that link their discount cards to Upromise; and bonuses for shopping at partner retailers online and eating in affiliated restaurants.

Lisa Roll, a financial adviser in Glen Gardner, N.J., has saved about $7,500 toward her two sons’ college expenses in the eight years she has been enrolled in ­Upromise. She even enlisted her mother-in-law, who can contribute her spending power to Ms. Roll’s account through Upromise’s friends-and-family system. “I went to their house and took her wallet and signed up all of her grocery and credit cards,” she says, adding that she also installed a Web browser toolbar that will help remind her mother-in-law to shop online at partner retailers.

THE PRESCHOOL YEARS

Once the grandparents tire of buying baby gear and cute outfits, you might sit them down for a conversation about how they can make a more lasting cash contribution to your toddler’s future. This isn’t always the easiest conversation to have.

“In most otherwise healthy families, the willingness of grandparents to save generally exceeds the willingness of parents to broach the subject with the grandparents,” Mr. McKinley says. “That’s good. It shows that parents aren’t money-grubbing. But it means it’s usually the grandparents’ duty to bring the subject up.”

If you’re a grandparent and your financial plan for retirement is secure, putting aside just one Social Security check a year for 18 years could pay for a good chunk of a child’s college education.
The question, however, is where to park that money during the intervening years. Grandparents can set up their own 529 accounts, which come with a few advantages. “If something were to happen and they really needed the money, they could take it back out of the 529 and pay taxes and penalties,” says KC Dempster, director of program development at the consultants College Money in Marlton, N.J. If there’s a falling out with the kids or the grandkids, they can also change the beneficiary and bestow their largesse on a more-favored family member.

Families wishing to qualify for financial aid, however, should keep in mind that a growing number of colleges and universities are asking whether grandparents or others have set up 529 accounts for a student and taking it into account when awarding their own grants.

Kalman A. Chany, president of Campus Consultants in New York City, advises that grandparents simply give money to the parents, who can then deposit it in their own 529. Many accounts will accept gifts from grandparents. Upromise facilitates 529 giving, too, as does Freshman Fund, an online gift registry.

One other big financial decision looms during the preschool years: when (or if) to have another child. If you have two children in college at the same time, your eligibility for financial aid grows significantly. “My instinct would be that there are still a lot of people out there who don’t understand how this works,” Ms. Dempster says. “They space their children out because the thought of two tuitions and room and board at the same time freaks them out.”

Mr. Chany says, only half-jokingly, that the best option may be to have twins.

GRADES ONE TO NINE

One decision you’ll eventually face is whether to put some (or all) of your savings into a prepaid 529 plan. Not every state offers one, and some states’ plans are closed to new investments. The rest, however, let you essentially pay today for tuition and fees in the future.

There are a number of catches here, depending on the state. You can usually participate only in your own state’s plan, and it often covers only tuition and fees. (Another plan, called the Independent 529, allows you to pay for member private colleges and universities around the country.)

There are also a number of ways states calculate the current “price.” While the idea of locking in a price may sound tempting, it’s crucial to understand exactly what $1,000 today will buy you when your child finally goes to college. What sort of discount do you get for prepaying part of the tuition each year? And what happens if you’re in a state plan and your child decides to attend an out-of-state university?How much of a return will your money have earned in that case? In the Independent 529 plan, for instance, your money won’t have earned more than 2 percent annually (nor can it lose more than 2 percent a year). That sounds good right about now, though investments in stocks over the next 15 years will probably do better.
By the time middle school draws to a close, you should have a clearer sense of your financial picture than you had 13 or 14 years earlier, and whether you’ll have a shot at qualifying for financial aid. The government’s expected family contribution calculator at www.fafsa4caster.ed.gov can help on this front.

Now you have to decide what to tell your child about the money situation and when. Mr. McKinley warns about revealing too much too soon. “Most kids are just so clueless about where they’re going to go and what they’re going to do,” he says. “It just adds one more pressure to start talking about it in eighth or ninth grade.”

By early in high school, however, colleges are already marketing to potential students. “If there are financial constraints, it’s important for the child to understand that,” says Mr. Chany, who is also the author of “Paying for College without Going Broke” (Princeton Review, 2007). “I think it’s not a good idea for them to spring surprises on the child” late in the process.

That said, he adds, perhaps the worst move is to forbid a student to apply to a dream school simply because of money worries. “All you need is one of the child’s friends with similar financial circumstances to get in and get a nice financial aid package and be able to afford it,” he says. “And then the child says to you for the rest of their life: ‘Why didn’t you let me apply to that school?’”

Freshman year in high school is also a good time to ratchet back investments in stocks, if you’ve had an aggressive asset allocation in your 529 funds so far. If you’re in a target-date mutual fund, with the date of your child’s matriculation in its name, check to see what percentage of the fund is in stocks and then reallocate your savings to something safer if you feel the need.

10TH AND 11TH GRADES

This is the moment to consider whether to hire an adviser who will examine your income and assets to better position your aid application. This can easily cost $1,000 in fees, but it may pay for itself if you receive more grants or qualify for better loans because of it.

Whether you hire an adviser or try to sort out the financial aid applications on your own, remember that colleges and universities currently consider the year from Jan. 1 of junior year to Dec. 31 of senior year as the “base” year for figuring out what the family can afford to pay for the first year of college.

That means that if you’re going to make any big changes to qualify for more aid, you need to do it between Jan. 1 of sophomore year and Dec. 31 of junior year — and start planning those moves even sooner.

What sort of moves might you make?

Since financial aid offices will tap some of your assets in calculating what you can afford to pay, there’s no shame in spending them down a bit sooner than you might have. If you need a new roof or new car, spend the money before the base year arrives. And pay down credit card debt. A big balance doesn’t win you a break when applying for aid, but colleges could tap your cash.

Mr. Chany suggests a number of other ideas. Since colleges generally take more from your income than they do from your assets, the base year or right before is a great time to start your own business (assuming your income will fall for a while in the start-up years). And to lower the income number that the financial system uses, front-load individual retirement account contributions before the base year.
By now you may be wondering about the ethics of all of this money moving. Do not lie on financial aid forms, but aid planning, like tax planning, is perfectly legal and appropriate.

SENIOR YEAR

Just as students should apply to at least one college where they know they will be accepted and happy, add at least one school your family is certain you can afford.

“If you’re going to get need-based aid, then you have to target the colleges that have money to give it,” says Ms. Dempster of College Money. “Otherwise, the entire exercise has been pointless.”

The student also has to fit the college personally before you worry about money. “If not, they may drop out or transfer or do poorly,” she says. “They’ll end up doing things that make college last longer, and that just makes it more expensive.”

Then, finally, comes application time, a process you’ll repeat at least three more times because you have to refile each year. The Free Application for Federal Student Aid and other forms you may encounter are intimidating. Fill them out anyway, even if you don’t think you’ll win grants from your chosen college, because you never know where you might end up or how your financial circumstances may change.

If grandparents wish to step in at this late stage, be aware that giving money to parents or making tuition payments directly to the college can have a big impact on aid eligibility. Consider paying off the child’s loans (or the parents’) after college graduation.

Some of you are reading this with aid offers for your high school seniors in hand. If you are, you now know that a fair bit of randomness takes hold once you apply. Financial aid officers can and will do what they want and sweeten packages for more desirable students. While many a parent tries to play one offer off another, Mr. Chany points out: “The decisions of the financial aid officer are final and cannot be appealed to the government. It’s worse than dealing with the I.R.S. There’s no tax court.”

All the more reason, then, to start early. “Parents beat themselves up about having done nothing and then continue to do nothing because they think it’s hopeless or scary,” he says. “That’s the worst thing that anyone can do. The longer they wait, the harder it’s going to get.”
Ron Lieber writes the Your Money column for The Times.